2021 was another great year for investors. Will 2022 be even better?
As 2021 draws to a close, investors remain astonishingly calm. While politicians race to lock down as the Omicron variant spreads like wildfire, and US inflation soars to a 30-year high of 6.8%, global stock markets continue to trade near their all-time highs.
Investors are also shrugging off other worries, including the Chinese property crash and the potential Russian invasion of the Ukraine.
So can investors continue to keep their cool in 2022?
Uncertainty is rife
There's an old saying that stock markets hate uncertainty, but it doesn't seem to apply right now.
We have no idea how much damage Omicron and inflation will inflict, but equity investors are choosing to assume the best rather than the worst. After enjoying three bumper years of stock market growth, they have set their sights on a fourth in 2022.
In 2019, before we'd even heard of coronavirus, global stock markets rose a staggering 28.40%, as measured by the MSCI World index.
Last year, despite all those endless Covid lockdowns, global shares somehow rose another 16.50%.
In the year to 30 November 2021, they climbed another 17.30%, making this a third consecutive year of double-digit growth.
These figures show that nobody who is serious about building long-term wealth can afford to shun the stock market.
Investors have been able to shrug off Covid uncertainty because policymakers “aggressively” flooded markets with fiscal and monetary stimulus, says Matt Weller, global head of research at Forex.com. “Indices continued to ride high on that stimulus in 2021.”
History suggests 2022 could be a good year for equity investors, too, he adds. “The Dow Jones Industrial Average has seen four previous three-year winning streaks, and three of those extended into a fourth year.”
Shares remain a winning bet
Mr Weller says markets face three threats. First, after a decade of strong returns, share price valuations are "relatively rich compared to historical averages”, and this may slow future returns.
Second, we have passed "peak stimulus”, as countries look to cut normalise monetary policy, shrink deficits and fight inflation.
Third, rising prices may drive up interest rates and borrowing costs, and squeeze consumer confidence and company profitability.
Yet Mr Weller says equities have one major factor in their favour. "There is no alternative for investors, as the appeal of holding safe assets like cash and bonds is as low as ever.”
Andrew Bell, chief executive of the Witan investment trust, says markets will enjoy a further boost as business launches an “overdue drive to combat the effects of climate change and decarbonise economies”.
He calls this a “multi-decade opportunity” for investors, and the environmental, social and governance (ESG) sector.
Given all the positives, any stock market crash in 2022 is more likely to be a buying opportunity than reason to panic.
Another bad year for boring bonds
By contrast, 2022 looks like being a tough year for supposedly low-risk government and corporate bonds. They pay a fixed rate of interest, which means their appeal slumps when inflation takes off.
Mr Bell warns: “It is mathematically hard to see how holders of government bonds yielding less than 2% will avoid long-term real losses.” 2021 was another good year for prime global property with prices rising 9%, and there’s a further 7% on the way in 2022, says Knight Frank head of international residential research Kate Everett-Allen. “New York and London look to be awakening from their slumber with the pace of prime sales quickening.”
Miami, Sydney, Los Angeles, Auckland, Geneva, Madrid, Singapore, New York and Hong Kong should also perform strongly, she forecasts.
As shares and house prices soar, gold has lost its shine. The gold price has fallen 3.70% year-to-date, from $1,879 to $1,812.
Two factors weigh on gold. First, higher interest rates will improve the returns on rival safe haven cash, whereas gold famously pays no interest.
Second, many now believe that Bitcoin has replaced the precious metal as a store of value.
Others are sceptical, given ongoing crypto volatility. Bitcoin opened 2021 trading at $29,388 and peak at $67,582 in early November, only to plunge back below $50,000. When you read this, it could be anywhere.
It's a rollercoaster ride so as ever, only invest for the long-term and never gamble money you cannot afford to lose.
In with the new
2021 saw the emergence of a whole new investment, known as non-fungible tokens, or NFTs. These are digital collectables that put a value on creative works such as art, sporting moments and even computer coding.
NFT was voted Collins Dictionary’s word of the year word but many don’t understand them at all. Gerald Banks, managing director of Cipher Technologies, cautions: “There’s no guarantee that any NFT will retain its value so only get involved if you can afford to lose your money.”
As 2022 dawns, the positives outweigh the negatives and this explains why shares are trading near all-time highs, says Luca Paolini, chief strategist at Pictet Asset Management.
Consumer and industrial demand is robust, supply bottlenecks will ease, and corporate earnings and margins remain healthy. “Despite the heightened uncertainty, the direction of travel is still towards reopening and near-normalisation of economies worldwide,” Mr Paolini says.
We can expect more political and economic volatility in 2022 but shares will survive and should continue to make up the bulk of your portfolio.
Happy New Year!
Harvey Jones has been a UK financial journalist for more than 30 years, writing regularly for a host of UK titles including The Times, Sunday Times, The Independent and Financial Times. He is currently the personal finance editor of the Daily Express and Sunday Express, and writes regularly for The Observer and Guardian Unlimited, Motley Fool and Reader’s Digest.
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